The chart on the top of this post shows that the Chinese stock market has a very long term trend moving upwards but lacked the global expansion badly in the recent years. In 2018 the Shanghai Composite dropped about 30% and even with this year`s gains China´s stocks are still 5% minus year-over-year (chart below).
There has been an extreme pessimism about China`s economy. Many Westerners claimed that China´s economy will crash. Instead we saw a gradually slowdown and China is still growing 6 plus % annually. China`s growth story is still intact, thanks to the secular catching-up process which is fueled by the still extreme income & wealth differences from the US and other Western nation standards, and ongoing economic reforms & huge investment into infrastructure. The extreme over-pessimism was overdue for a correction. It looks like that the China pessimism bubble is popping.
What triggered the rally? There are signals that US President Trump`s trade war may come to an end soon and the outcome wouldn`t be as bad as feared. In January Beijing announced tax cuts “on a larger scale” in order to boost business activity and The People's Bank of China injected more money into the market via a targeted cut of the reserve requirement ratio and this Tuesday China´s government declared they plan to respond to an economic slowdown by cutting taxes, easing burdens on the private sector and giving markets a bigger role (nytimes). As the long term chart shows the Shanghai Composite has still a long way to catch up.
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